J.P. Morgan Asset Management Finds Some Target Date Funds Overlook Critical Factors

 J.P. Morgan Asset Management Finds Some Target Date Funds Overlook Critical
                                   Factors

- Real-world participant behavior at odds with standard fund assumptions makes
for complex manager selection, plan design choices -

PR Newswire

NEW YORK, Nov. 30, 2012

NEW YORK, Nov. 30, 2012 /PRNewswire/ --Research released today by J.P. Morgan
Asset Management confirms decade-long patterns of suboptimal savings behavior
among defined contribution plan participants. Real-world activity among savers
is more unpredictable than many fund managers assume in their fundamental
design, often resulting in too much volatility being embedded in target date
funds.

J.P. Morgan's series "Ready! Fire! Aim? How some target date fund designs are
missing the market on providing retirement security to those who need it most"
began reporting in 2007 and now reflects 10 years of consistent data. The
research, which studies the relationship between target date glide paths and
actual participant investment behavior, is designed to provide empirical data
to plan sponsors struggling to determine what target date fund asset
allocation strategy is best suited to improve their plan participants'
retirement outcomes.

"Plan sponsors run the risk of falling short in best positioning participants
to achieve retirement security if they aren't assessing whether their target
date portfolio design stands up to the stresses of real-life saving and
investing," said Anne Lester, Managing Director, J.P. Morgan Asset Management
Global Multi-Asset Group.

Participant Behavior Patterns

A key finding is that the fund industry's modeling of participant behavior
patterns is often unrealistic. Consistent with previous years, participants
contributed less and borrowed and withdrew more than prevalent industry
expectations informing asset allocation models. Whereas convention wisdom
generally assumes participants start contributing at 6% and reach 10% of
salary by age 35, in actuality, as of the end of 2011, average participants
start contributing at 5% and increase slowly, not reaching 10% until age 59.
Contribution rates for auto-enrolled participants are even lower. Meanwhile,
large numbers of participants continue to take sizable account loans and
pre-retirement hardship withdrawals are on the rise. These suboptimal
behaviors directly translate into a wider range of projected participant
outcomes.

Another key finding is that most participants withdraw their entire account
balances shortly after they stop working. As of 2011, 83% of participants have
withdrawn their entire account balance within just three years of retirement.
This has significant implication for the "to" versus "through" glidepath
debate in the target date fund industry, as it relates to contention over the
appropriate level of equity risk at the point of retirement. These withdrawal
figures suggest that maintaining outsized equity allocations in years leading
up to retirement subjects participants to unnecessary and dangerous risks just
as they are most prone to withdraw their assets.

"It's risky for target date funds to rely heavily on equities, but at the same
time they can't curtail long-term return potential by being too conservative.
We think the solution is to increase risk efficiency through broader asset
class diversification, such as incorporating high yield, direct real estate,
emerging market equity and debt and other asset classes to lower expected
volatility without sacrificing return potential," said Daniel Oldroyd,
Portfolio Manager of JPMorgan SmartRetirement target date strategies, J.P.
Morgan Asset Management Global Multi-Asset Group. "A stronger risk-adjusted
return profile can also help mitigate the long-term impact of these negative
participant behaviors, such as loans and contribution shortfalls, that we see
occurring increasingly among savers."

Comparing Target Date Fund Designs, Combating Suboptimal Behaviors

Having a well-designed target date fund offers the greatest chance of
retirement security for the vast majority of participants. However, it's hard
to compare target date funds on an "apples to apples" basis and short-term
performance can be misleading when evaluating strategies. Plan sponsors have
to look at long-term return potential, embedded volatility, asset allocation
and how these nuances interplay with real-life participant behaviors. J.P.
Morgan Asset Management's Target Date Compass tool objectively maps competing
fund strategies across quadrants based on portfolio composition and risk
levels to give sponsors and advisors a comparative view. Regardless of how
they choose to assess fund choices, plan sponsors should carefully consider
the type of strategy that will best meet their particular plan's needs and
goals.

Plan Sponsors need Proactive Plan Design, Higher Auto-Enrollment and
Auto-Escalation

Despite the increasing adoption of automatic plan design features such as
automatic enrollment and automatic escalation, J.P. Morgan findings show that
overall contribution rates are generally in decline. On average, new plan
entrants are contributing less overall and growing their contributions more
slowly. The average auto-enrolled participant contribution rate was 4%, almost
half the average contribution rate of 7.7% for non-auto-enrolled participants.
Plan sponsors have a unique opportunity to help participants save more by
setting rates higher, and even more importantly setting escalation programs to
rise more quickly to reach 10%. Otherwise, they may find that participants are
forced into the difficult game of "retirement catch up" in their 40s, 50s and
60s or risk underfunding their retirement needs.

"When it comes to getting as many participants over the retirement finish line
as safely as possible, proactive plan design can be equally as important as
investing and asset allocation," said Mr. Oldroyd. "Defined contribution plans
are ultimately a partnership between participants and companies, but the
reality is that sponsor decisions have a tremendous impact on retirement
outcomes."

Methodology
J.P. Morgan Asset Management conducted rigorous, quantitative examination of
real-world participant savings and spending patterns over 10 years based on a
group of 280 defined contribution plans with 1.5 million participants
administered by J.P. Morgan Retirement Plan Services.

About J.P. Morgan Asset Management – Retirement

J.P. Morgan Asset Management is a leading comprehensive retirement solutions
provider dedicated to improving individual retirement outcomes. J.P. Morgan
Retirement Plan Services provides bundled defined contribution services to
more than 650 clients and 1.8 million plan-level participants, representing
more than $125 billion in retirement plan assets as of September 30, 2012.
J.P. Morgan Defined Contribution Investment Solutions manages more than $69.7
billion in defined contribution assets as of September 30, 2012.

About J.P. Morgan Asset Management

J.P. Morgan Asset Management, with assets under supervision of approximately
$2.0 trillion and assets under management of $1.4 trillion (as of September
30, 2012), is a global leader in investment management. J.P. Morgan Asset
Management's clients include institutions, retail investors and high-net worth
individuals in every major market throughout the world. J.P. Morgan Asset
Management offers global investment management in equities, fixed income, real
estate, hedge funds, private equity and liquidity. JPMorgan Chase & Co.
(NYSE:JPM), the parent company of J.P. Morgan Asset Management, is a leading
global asset management firm with assets of approximately $2.1 trillion and
operations in more than 60 countries. Information about JPMorgan Chase & Co.
is available at www.jpmorganchase.com.

Opinions, estimates, forecasts, projections and statements of financial market
trends that are based on current market conditions constitute our judgment and
are subject to change without notice. There can be no guarantee they will be
met.

TARGET DATE FUNDS: Target date funds are funds with the target date being the
approximate date when investors plan to start withdrawing their money.
Generally, the asset allocation of each fund will change on an annual basis
with the asset allocation becoming more conservative as the fund nears the
target retirement date. The principal value of the fund(s) is not guaranteed
at any time, including at the target date.

IRS Circular 230 Disclosure: JPMorgan Chase & Co. and its affiliates do not
provide tax advice. Accordingly, any discussion of U.S. tax matters contained
herein (including any attachments) is not intended or written to be used, and
cannot be used, in connection with the promotion, marketing or commendation by
anyone unaffiliated with JPMorgan Chase & Co. of any of the matters addressed
herein or for the purpose of avoiding U.S. tax-related penalties.

SOURCE J.P. Morgan Asset Management

Website: http://www.jpmorganchase.com
Contact: Charlotte Powell, +1-212-622-4332, charlotte.f.powell@jpmorgan.com
 
Press spacebar to pause and continue. Press esc to stop.